How Chipotle Reinvented Itself

Shares of Chipotle Mexican Grill (NYSE: CMG) look set to pop this morning after the restaurant chain topped Wall Street expectations for its fourth quarter. Reporting last night, the company posted adjusted earnings of $2.86 per share on revenue of $1.4 billion. Impressively, Chipotle saw same-store sales growth hit 13.4% for the quarter, well above estimates of 9.5%. This was driven by increased testing in the restaurant's sales model under new CEO Brian Niccol, including digital ordering options that now account for nearly a fifth of the company's sales.

The story of Chipotle has certainly been one of boom and bust. As we look back on a hugely successful year for the burrito chain, it's worth remembering that as recently as 2018, Chipotle's brand was utterly tainted by an association with E. coli and other kitchen nightmares. The incident was the most widely publicized, but by no means the only outbreak of its kind and the results for Chipotle's reputation were disastrous. A report at the time found that as many as 60% of the chain's previously loyal customers "actively" avoided the chain upon hearing the news.

Much of the praise for the company's astonishing comeback since then can be directed toward Brian Niccol, who was appointed CEO in 2018. Under Niccol's leadership, Chipotle has managed to shed its pariah status and regain its place near the top of the fast-food pyramid. Niccol's strategy placed heavy emphasis on three aspects of the business: marketing, digital sales, and the company's 2,500 physical locations themselves.

Chipotle's marketing strategy has focused on building better customer trust, partly by highlighting the simplicity of the menu. Last year saw the launch of the company's "For Real" ad campaign, which promised that Chipotle's offerings were comprised of ingredients "everyone can both recognize and pronounce." The related "Behind The Foil" commercials ramped up the transparency by offering into a typical Chipotle kitchen. These initiatives are hardly groundbreaking, but they mark a departure from an earlier attitude to marketing, which was so ineffective that Niccol himself dubbed the Chipotle brand "invisible" before he got his hands on it.

Another area where Niccol's strategy can be seen to pay off is in Chipotle's burgeoning digital business. Although the company has had a loyalty app since 2017, it was only last year that it eliminated its reliance on third-party delivery service DoorDash, allowing customers to order directly through the Chipotle app. On top of that, the architecture of the locations was updated to include pick-up areas as well as digital-only queues, maximizing convenience. The changes are proving remarkably effective. Digital orders jumped a full 90% in fiscal 2019 and now account for just under 20% of total sales.

Let's not forget about what may be Niccol's most ambitious project yet as Chief Executive either. Last February, the company announced that it would begin testing what it called "Chipotlanes" -- drive-thru lanes tied to its digital platform. In the most recent report, Chipotle revealed that it has 66 Chipotlanes currently opened and is forecasting to open another 150-165 new restaurants in the coming year, of which more than half will have Chipotlanes. Drive-thru lanes have proved invaluable to fast-food giants such as McDonald's (NYSE: MCD), accounting for well over half of sales. As with the focus on marketing and the push towards all things digital, this will certainly be a development worth watching.

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